Credit Suisse projects strong Q2 for WAG

NEW YORK — Following the recent sale of Walgreens' pharmacy benefit management business, Credit Suisse analysts said they are interested in the executive team's updated thinking on their healthcare strategy and plans for the $550 million in proceeds.

In a pre-results note issued Monday, Credit Suisse analysts said they projected second-quarter earnings per share for Walgreens to be at least 82 cents, 2 cents above consensus, as well as overall strong sales. Additionally, they noted that continued gross margin expansion will help the drug store chain beat Wall Street estimates.

"We expect its recent earnings momentum to continue. ... We project a 40 bps improvement in the FIFO GM (versus +81 bps increase reported in the first quarter), with the deceleration attributed to more difficult [year-over-year] comparisons," wrote Credit Suisse research analyst Edward Kelly. "Management’s tone on the front-end margin has been positive, reflecting strong holiday sell-through and the continued emphasis on smarter promotions/more profitable sales growth. Pharmacy margins have less potential for upside in our view given the current lull in the generic cycle."

What's more, the analysts referred to Walgreens' selling, general and administrative expenses as a "key unknown" in the second quarter, stating that they assumed "stable two-year stacked growth but recognize that a continuation of last quarter’s momentum would provide upside to [our] estimate. We continue to believe full year [selling, general and administrative expense] will come in at the low end of the company’s 6.5% to 7.5% guidance."

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